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MONEY AND CREDIT REMIX

Published online by Cambridge University Press:  28 September 2020

Luis Araujo  and
Leo Ferraris
Luis Araujo
Affiliation:
Michigan State University and Getulio Vargas Foundation
Leo Ferraris*
Affiliation:
Universita’ di Roma, Tor Vergata
*
Address correspondence to: Leo Ferraris, Universita’ di Roma, Tor Vergata, via Columbia 2, 00133, Rome, Italy. e-mail: leo.ferraris@uniroma2.it.
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Abstract

Money and credit are ubiquitous in actual economies, but there is an active theoretical debate on whether they are both necessary if they can both be used in all transactions. Recently, Gu et al. (2016) have shown that money and credit cannot be simultaneously essential and debt limits do not matter for the determination of real allocations in a class of monetary economies. In this paper, we revisit their irrelevance result in a monetary economy based on Lagos and Wright (2005), which exhibits a misallocation of liquidity that is common in search models of money. We show that monetary loans, which naturally require the use of both money and credit, implement Pareto superior allocations in which the size of debt limits matters.

Keywords

MoneyCreditEssentialityMonetary Policy
Type
Articles
Information
Macroeconomic Dynamics , Volume 26 , Issue 4 , June 2022 , pp. 1021 - 1034
Copyright
© 2020 Cambridge University Press

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Footnotes

This paper has been presented at the 2018 Wisconsin Midwest Macro meetings and at the 2018 St. Louis Fed Summer Workshop on Money, Banking, Payments, and Finance. Comments and suggestions by seminar participants are gratefully acknowledged. Remaining errors are ours alone.

References

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